History 1807 - Exam Topics.docx - All the Devils Are Here...

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All the Devils Are Here- Mclean and Nocera – Financial CrisisGovernment’s agenda for homeownership, deregulation and backing of mortgage-backed securities-The government agenda of putting more Americans into homes, even if not beneficial overall for economy -American dream, manipulated by corporations and caused government to ignore problems, willful blindness,-Shut down those who opposed subprime mortgages, defended against states that wanted laws to protect against subprime-Began to ease and set laws that enabled subprime mortgages Alan Greenspan: Chairman of the Federal reserve at the time who repealed the Glass Steagall Act, callingfor more deregulation. After crisis he was wrong about his calls for deregulation -National Homeownership Strategy during Clinton administration – 8 million families in new homes in 6 years-Bush administration, 5.5 million-GSE’s (Fannie Mae, Freddie Mac) first started in 1930s, buy mortgages on behalf of government to spur homeownership-Primary sellers of mortgage-backed securities at the start, implied to have government’s support and backingMore government intervention/regulation - Control/regulate rating agencies Rating Agencies (Moody’s), their AAA ratings for any bond/security involving mortgage backed securities only created more interest from investors, making industry expand and risks worsen-Couldn’t lower ratings after a while because it would devastate companies who had relied on it to sell mortgages securities to investors-competition from other rating agencies became incentive to keep AAA ratingMortgage-backed securities-Introduced in 1970’s, serve similar purpose to bonds, but would be backed by mortgages-Fannie Mae and Freddie Mac first to use, intended to increase homeownership-Eventually, Wall Street companies got hold of it (JP Morgan, Merrill Lynch, AIG, Goldman Sachs)-Allowed financial institutions to use mortgages in a way that could be tied up in multiple tranches of securities/CDOs, were used to create money despite immense risks of defaults-Essentially, it transfers responsibilities of defaulting elsewhere
-Wall Street refined process with tranches that appealed more to investors-JP Morgan brought derivatives, derivatives caused companies to not do due diligence, not look into riskyloans, risks that were bound to fail– Mortgage originators used securities to secure funds in order to induce worse and worse loans/mortgages to earn more money Subprime-mortgages-Mortgage originators such as Ameriquest, Countrywide Financial took advantage of mortgage-backed securities to grant more mortgage loans, of which were worse in quality-With mortgages then packaged into tranches, investors would not know the riskiness of mortgages-Subprime mortgages given to those who couldn’t pay back, and people more likely to default had to agree to higher interest terms, meant more money when sold as security-Lied about incomes, lied about jobs, changed ages of people, gave loans to worse people for more yield

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